Foreign Ownership and Capital Structure Dynamics

Abstract This study explores the relationship between foreign investors and the dynamics of capital structure. Using a sample of listed firms in Taiwan during the period from 1997 to 2016, our results reveal that firms with higher foreign ownership are less likely to issue debt, indicating that foreign investors serve as a direct substitute for debt by enhancing corporate governance. Moreover, foreign investors help reduce leverage adjustment costs, which in turn increases the speed of adjustment toward target leverage. Overall, this study highlights the important role played by foreign investors in shaping firms’ optimal capital structure decisions and shareholder wealth maximization, and thus provides evidence in supporting a positive view of foreign ownership in emerging markets.